What are convertible notes and SAFEs and what are the major differences?
Takeaway: Convertible notes are debt and SAFEs are not, a fundamental distinction that drives all the other differences between these two primary instruments for seed-stage fundraising, including interest rates, maturity dates, and investor rights.
The convertible note and the SAFE (Simple Agreement for Future Equity) are the two pillars of early-stage fundraising. They both achieve the same core goal: they allow a startup to raise capital now while deferring the difficult valuation discussion until a future priced round. However, they are two distinct legal instruments with different structures, terms, and implications for both the founder and the investor.
Understanding the fundamental difference is critical. A convertible note is a form of debt. A SAFE is a warrant, a contractual right to receive equity in the future. This core distinction informs all the other differences between them.
The Convertible Note: A Loan That Converts to Equity
A convertible note is a short-term loan to the company. The investor lends money to the startup, and the company promises to repay that loan with interest at a future date.
The "Conversion" Feature: The key feature is that instead of being repaid in cash, the principal and accrued interest on the note will automatically convert into equity (typically preferred stock) at the company's next priced financing round.
Key Debt-Like Features: Because it is a debt instrument, a convertible note has several standard features of a loan:
An Interest Rate: The note accrues interest over its term. This interest also converts into equity.
A Maturity Date: The note has a fixed term (e.g., 18-24 months). If the company has not raised a priced round by the maturity date, the note becomes due and payable, which can create a major financial crisis for the startup.
Potential for a Security Interest: In rare cases, a note may be secured by the company's assets.
The SAFE: A Simpler Agreement for Future Equity
The SAFE was invented by Y Combinator to be a simpler, more founder-friendly alternative to the convertible note. A SAFE is not debt. It is a contractual agreement that gives the investor the right to receive equity in a future financing.
No Debt Features: Because it is not a loan, a SAFE has no interest rate and no maturity date. This is its primary advantage for founders. There is no ticking clock that could force the company into insolvency. The SAFE simply remains outstanding until a priced round occurs, whenever that may be.
Simplicity: The standard YC SAFE is a short, five-page document. It is designed to be a standardized, "off-the-shelf" instrument that requires minimal legal negotiation, making the fundraising process faster and cheaper.
The Key Differences at a Glance
Convertible Note:
Legal Form: Debt Instrument
Interest Rate: Yes, it accrues interest.
Maturity Date: Yes, typically 18-24 months.
Complexity: More complex, often requires more negotiation.
Investor Preference: Often preferred by more conservative, traditional angel investors.
SAFE (Simple Agreement for Future Equity):
Legal Form: Convertible Security (a Warrant)
Interest Rate: No
Maturity Date: No
Complexity: Simpler, more standardized.
Investor Preference: The standard for most Silicon Valley VCs and accelerator-stage funds.
While both instruments achieve a similar outcome, the SAFE has largely become the dominant and preferred instrument for seed-stage fundraising in the modern startup ecosystem due to its simplicity and founder-friendly lack of a maturity date.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.